In an attempt to rein in high inflation, the European Central Bank last week raised interest rates by 50 basis points for the first time since 2011. This step - which came into effect last Thursday - comes at a time when Europe is battling record inflation fueled by the remnants of the Corona pandemic, the Russian-Ukrainian war and the rise in food and energy prices, as the annual inflation rate in the European market jumped to 8.9% last July, after 8.6% last June, according to data from the European Statistical Office "Eurostat", and the high rate of inflation exceeded the European Central's expectations by more than 4 times, as it was targeting 2%. The European economy is currently threatened by a set of risks as a result of raising interest rates, according to the opinion of economic experts, most notably the possibility of the European economy entering a period of recession. Delayed decision to raise interest rates from the European Central As a result of the imbalances related to the Corona pandemic, the Russian-Ukrainian war and the great changes and pressures it caused, global central banks responded quickly to the high level of inflation, especially the US Federal Reserve, which raised the interest rate 4 times during the current year, the last of which was 75 basis points. At the same time, the delay in the European Central's decision to raise interest rates caused the exchange rate of the euro against the dollar to collapse until it reached record levels not reached in 20 years. For his part, Dr. Hassan Ebeid, head of the Center for Research and Economic Development in Paris, and professor of banking and finance at the Paris Business School, indicated that this delay is due to two reasons: the first is structural administrative, and the second is financial. He added to Al Jazeera Net that "the structural reason is due to the fact that the European Union is a group of countries, and not a group of states such as the United States, in which the decision is quickly taken by one central bank. Therefore, the decision-making process from the European Central is very complicated, as most countries must agree after entering into long discussions. ". He continued, "The financial reason is related to countries that have many debts, such as Italy, Greece, Portugal and Spain. If a decision is taken to raise the interest rate, this matter will automatically lead to an increase in debt costs for these countries. Therefore, the decision was taken carefully to find solutions for these countries in how to buy bonds or part of them and then raise interest rates.” In parallel, Dr. Alain Safa, professor of economics and geopolitics at the University of Nice, and president of the French economic association Smavi International, argues that the delay is because the European Central Bank wanted to keep inflation low in order to help weak countries get through their heavy debt. Implications of raising interest rates on consumers and investors Alan Safa continues his speech by saying: "When countries start to raise interest rates, private companies directly start raising interest rates on their long-term debts, especially for real estate and investments, and the same for consumers. It leads to a slowdown in the economic wheel, a decrease in the rate of growth, a rise in the unemployment rate, and a decrease in the rate of production.” Safa concludes that there are positive results of raising the interest rate by reducing inflation, but there are also negative results, so the policy of central banks is to achieve a kind of balance between the positives and negatives. Curb Inflation The European Central Bank's Monetary Policy Committee confirmed last week that its goal of raising the interest rate is to reduce the inflation level to 2%, "by strengthening the consolidation of inflation expectations and ensuring that demand conditions are adapted to achieve the inflation target in the medium term." For his part, Obeid fears that raising the interest rate by 0.5% is a very small rate compared to the 8.9% inflation rate. Therefore, this will not lead to any tangible results on the ground in terms of a decline in the high rate of inflation and an improvement in the economic situation, but rather it will lead to an economic downturn. He continues, stressing that this fear is not only European, but is also a global fear. Because in the United States, despite the interest rate being raised more than once in the past months, inflation has not yet been brought under control. It will not be controlled either in the foreseeable future. Safa believes that the problem of rising inflation is deeper than the strength of demand for raw materials, otherwise raising interest rates will make them decline, and thus inflation will decline. Therefore, he explains that the prices of raw materials and the demand for them have a close relationship with geopolitical relations, and when these relations deteriorate, the prices of raw materials will remain high, and this of course cannot be fought only with fiscal policy. He points out that the economic outlook keeps inflation high in the European market and in the United States until 2024. Challenges facing the European Central To face the challenge of helping the weak EU countries that suffer from high indebtedness, such as Italy, Greece, Portugal and Spain, the European Central announced - coinciding with its announcement of raising interest rates - a new tool dedicated to crises called "the anti-fragmentation tool". Dr. Hassan Ebeid explains that the challenge is not only facing the European Central Bank, but also the European Union in general. Because the central bank is only responsible for monetary policy, but production policy and political decision-making are related to Brussels. He explains this, saying, “It is true that increasing the interest rate directly leads to burdening the highly indebted countries such as Italy, Greece, Portugal and Spain, but it seems that the central bank is aware of this issue, and is doing what is called quantitative easing by buying bonds of these countries at pre-agreed interest rates to reduce the the cost to these countries

Expected solutions In light of the contradiction between raising the interest rate in order to curb inflation and the decline in growth and economic deflation, as a result of the decline in purchasing power, the economic outlook becomes bleak, for the second half of 2022 and beyond. To get out of this impasse, Dr. Hassan Obaid says, "The solution lies in improving the wheel of production and internal consumption and urging them, because raising the interest rate leads to increased saving and reduced consumption." On the other hand, Dr. Alan Safa confirms that the way out of the crisis in the medium term is to continue raising interest rates in a gradual manner so that there is no strong decline in the economic system. And because fiscal policy cannot provide all solutions, Safa advises that governments should intervene in order to help consumers and investors bear the consequences of this period, because maintaining purchasing power will allow the economy not to contract strongly.

Source: Al Jazeera